Continual Evolution

Perspective on housing

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I have been trying to get a synoptic sense of where we are in the housing triggered liquidity and credit crisis.

Unfortunately, fundamental metrics seem to indicate that the housing problem still has a long way to go before it will turn. For example, using ratio of home prices to rental rates as a metric, economists are suggesting that average home prices have declined only 10% of the 25% needed to restore affordability.

A full 25% decline will cause about 20 million people to have negative equity (25% of all homes). This will result in $6 trillion or $7 trillion in total capital losses in housing and $1 trillion of that will be losses to the financial sector. So far only a fraction of that has been declared. Thus we will continue to see more declarations of losses for quite a while.

On the other hand, the inventory of newly built house has finally stopped rising and even started declining due to sharp reductions in new houses being built coupled with the drop in prices. If this process continues then eventually we will reach the point at which new houses will have to be built again and normalcy will be restored. I think we are still multiple quarters away from this point.

Since the stock market is a discounting mechanism it should recover somewhat sooner that these underlying fundamentals would suggest. Thus there is a reasonable probability that we will see the market turn this year, although not perhaps within the timeframe of this round of our competition.

The housing situation impacts the entire portfolio, but it particularly impacts two of my positions: LOOP and RATE.

Loopnet (LOOP) is the leading online "MNLS" type listing service targeting brokers of commercial real estate. They make money on subscriptions and hence are indirectly driven by real estate transactions rather than on prices. They reported in their last release that they are seeing revenue shift from buyers to sellers who pay them to list their properties. I think LOOP is still a good buy at this point so I will continue to hold it.

Bankrate.com (RATE) is the leading website that aggregates information on mortgages, credit cards, automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans, and online banking fees. It makes money by supplying this information to leading newspapers (100+ papers, including WSJ, NYT & USA Today) as well as by charging for click-thru when users click on its rate table entries. Its business has held up really well through this crisis (in fact it has continued to grow!). This is because shifts in interest rates drive fresh traffic to its website as consumers shop for optimal rates. I think this will be a good stock to own right through the housing recovery.